If the seller is willing to escrow - then you're in great shape. However, even if you close and pay the seller that still doesn't preclude you from pursuing the contractor as described before. You have 4 years to pursue the contractor before the statute of limitations expires - so you have lots of time.
Would it be wise to talk with the Title company if we find that a lien is actually been recorded?
It's recorded and of public record in days. I would talk to the title company but they are going to say to pay the seller and go after the contractor.
Do you know how long it takes from the time the Claim of Lien is filed to when an actual lien is attached to the property? We already have a schedule C and have paid for the title search. However, we don't want to interrupt the transaction and would prefer to be forthright.
It's really your problem as to the lien. However, as I stated, I would contact the contractor and negotiate a settlement for nominal amount or pursue them in court.
If we have to pay it - the lien - (our interest rate may expire while we are arguing and we would like to avoid that - plus the Seller is anxious to see her money), can we sue for interfering with the transaction?
No, your only recourse is for your damages given the facts you presented.
He knew that we were in the middle of the deal. If we do pay him, doesn't a release of lien suggest that we release him and won't come back for our damages? Or do you simply add the lien amount (after paying it) into a future suit?
Yes, the lien amount are part of your damages against him if you file suit (along with the other damages I stated before). I would contact and try to negotiate a settlement but if that's unsuccessful file suit asap but pay the lien so that you don't lose your interest rate.
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When we offered him a very, very fair settlement, he specifically asked if we were going to 'indemnify' him. This suggests that he was aware that there a multiple issues with his work.